Taiwan’s Problem Is the Economy, Not China

The island is overregulated, lacks free-trade agreements and needs a balanced budget.

When Tsai Ing-wen took office on May 20 as Taiwan’s first female president, most observers listened for what she would say about Taiwan’s relations with China. Instead, Ms. Tsai focused her inauguration speech on domestic matters, underscoring the new administration’s belief that in order to survive and prosper, Taiwan needs above all to focus on the problems it faces at home.

Ms. Tsai drew attention to several areas, including the restructuring of Taiwan’s economy, strengthening its social safety net and the promotion of social fairness. She called for a consensus on two reform priorities in particular: pensions and the judiciary.

The new president expressed Taiwan’s desire to be included in free-trade negotiations, including the second round of talks for the Trans-Pacific Partnership and the China-led Regional Comprehensive Economic Partnership. She also highlighted a new “go south” policy, promoting investment in the Association of Southeast Asian Nations and India, and “bidding farewell” to Taiwan’s “overreliance on a single market.”

In a meeting with foreign delegates the next day, Ms. Tsai stressed the importance of continuing the Trade and Investment Framework Agreement talks with the U.S. She implied that pivoting from a focus on Taiwan’s bilateral relationship with China to strengthening multilateral and bilateral ties to the rest of the world would be central to Taiwan becoming a vibrant and sustainable economic powerhouse again, with political values aligned with market democracies.

ENLARGE

Tsai Ing-wen in Taipei, Taiwan, on Jan. 16.PHOTO: BLOOMBERG NEWS

To achieve all these goals, Ms. Tsai has important challenges ahead. Domestically, it will be difficult to restructure a highly regulated economy that has yet to transition from manufacturing to services. Internationally, Taiwan hasn’t been able to join international organizations or sign many free trade agreements over Beijing’s objections.

Ms. Tsai’s Democratic Progressive Party also lacks members who understand the private sector. Her new cabinet members are primarily technocrats. In outlining her vision for a new economic model, Ms. Tsai stressed the need for industrial planning by the central administration.

This is worrying. It’s a throwback to Taiwan’s earlier days as an economic miracle, when it emerged as one of the four “dragons.” But in order to stimulate and enable small- and medium-size enterprises to thrive today, Taiwan needs to allow market forces to lead, rather than let the central government groom specific industries.

Maintaining a balanced budget will also be difficult. Although Ms. Tsai is widely believed to be fiscally conservative, her list of goals include innovation, employment, equitable distribution, labor rights, the social safety net, food safety and environmental sustainability. Achieving these objectives will involve difficult trade-offs.

In the end, while it was unavoidable that Ms. Tsai addressed relations with Beijing in her speech, she did so in the context of Taiwan’s interest in regional peace and global issues. Ms. Tsai did extend an olive branch to Beijing by referring to the Constitution of the Republic of China and the legislation governing cross-Strait relations, both of which suggest that Taiwan is in some sense part of a larger China. But she made it very clear that Taiwan’s fledging democratic values cannot be compromised.

The new president’s biggest challenge is to fulfill Taiwan’s role in maintaining global peace and stability while satisfying the aspirations of young people. Like their counterparts in other high-income countries, they face rising real-estate prices, diminishing job prospects and an increasingly inequitable society.

For Ms. Tsai, the focus is on Taiwan and the welfare of its people, rather than on China or cross-Strait relations. Taiwanese want their government to strengthen the foundations of their free and democratic society. Closer relations with China may contribute to that effort or obstruct it, but many Taiwanese believe that integration is still a choice to be made, not just a fact to be accepted.

Ms. Lin teaches at the University of Virginia and the Chinese University of Hong Kong. She is the author of “Taiwan’s China Dilemma” (Stanford).